And now there are four.
Hard on the heels of their second quarter report comes a new issue announcement:
it has entered into an agreement with a group of underwriters led by TD Securities Inc. for an issue of 8 million non-cumulative 5-Year Rate Reset Preferred Shares, Series S (the “Series S Shares”), carrying a face value of $25.00 per share, to raise gross proceeds of $200 million. TD intends to file in Canada a prospectus supplement to its January 11, 2007 base shelf prospectus in respect of this issue.
TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series S Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing. The maximum gross proceeds raised under the offering will be $250 million should this option be exercised in full.
The Series S Shares will yield 5.00% per cent annually, payable quarterly, as and when declared by the Board of Directors of the TD, for the initial period ending July 31, 2013. Thereafter, the dividend rate will reset every five years at a level of 160 basis points over the then five-year Government of Canada bond yield.
Holders of the Series S Shares will have the right to convert their shares into Non-cumulative Floating Rate Preferred Shares, Series T (the “Series T Shares”), subject to certain conditions, on July 31, 2013, and on July 31 every five years thereafter. Holders of the Series T Shares will be entitled to receive quarterly floating dividends, as and when declared by the
Board of Directors of TD, equal to the three-month Government of Canada Treasury Bill yield plus 160 basis points.
The issue qualifies as Tier 1 capital for TD and the expected closing date is June 11, 2008.
Issue: Non-Cumulative 5-Year Rate Reset Class A Preferred Shares, Series S
Size: 8-million shares @ $25.00 = $200-million
Greenshoe: 2-million shares (= $50-million) up to two days prior to closing.
Ratings: DBRS: Pfd-1; S&P: P-1(low); Moody’s: Aa2
Dividends: 5.00% until first Exchange Date; reset to 5-Year Canadas + 160bp every exchange date.
Convertible: Back & forth between Series T Floaters every exchange date. Series T pays 90-day T-Bills + 160bp
Exchange Date: July 31, 2013 and every five years thereafter
Redemption: Series S & Series T redeemable every exchange date at $25.00. Series T redeemable any other time at $25.50.
Rank: Parri Passu with all other preferreds, senior to common
Closing: June 11, 2008
Well … if I didn’t like the other ones, I’m not going to like these ones! But it looks like the structure is popular, so I guess I’d better start going over the HIMIPref™ code and determining just what will need to be done before I can add them to the universe.
As I’ve stated before … I’ll be adding the class to HIMIPref™ as soon as there are enough outstanding so that one could reasonably expect to execute profitable trades within the class.
Update, 2013-6-22: This trades as TD.PR.S
This structure seems relatively attractive to me. Realizing that they pay slightly less than the fixed rate perpetual prefs, my thoughts on eventual scenarios are:
If rates fall substantially:
-A fixed rate perp will likely be redeemed, forcing me to reinvest at a lower rate
-A fixed floater is less likely to be redeemed, but I’ll have to accept a lower rate on the reset.
If rates go up substantially:
-A fixed rate perp will never be redeemed, forcing me to either take a principal loss on my investment or live with the relatively low income for as long as rates stay high
-A fixed floater is less likely to be redeemed. If it is not, then income will rise along with rates. If it is redeemed at par, I can reinvest at higher current rates.
And finally, if I don’t like the rate reset, I can convert to a floating rate pref, which isn’t likely to vary greatly from par. If I hold fixed rate perpetual prefs and rates rise dramatically and stay high for an extended period of time, I’m stuffed. The fixed-floating structure mitigates that risk, does it not?
[…] Assiduous Reader meander likes the structure, as he explains in his comment on the new issue TD+160. As for myself, I will stick to my previously published analysis: these issues, at these rates, are […]
These new issues look overcomplicated to me. Glancing through their short description as received from TD webroker, I recall having noted that the BNS are non cumulative while the TDs are cumulutative and that the BNS may give “+170 bhp” while the TD may give “+160 bhp” after 5 years. I am not sure if the + 160 or 170 bhp is in relation to the same reference rate. However, what I wonder about is:
1. Assuming issuers of equal strength & reliability, which of the two issues is objectively better? The BNSs or the TDs?
2. Why have the 3 last issues of prefs by those two (BNS & TD) been so similar and almost simultaneous? Are they slowly moving toward a merger or is this just a matter of having a carbon copy policy of the other’s moves in their capitalization.
Both issues are non-cumulative – they have to be in order to qualify as “Tier 1 Capital”. For a (relatively!) brief explanation of Tier 1 Capital, see my introductory post in the “Primers” category.
The reference rate for the two issues is the same: the 5-year Government of Canada issue, measured according to a third-party (Bloomberg) review of the market.
1. The BNS issue is objectively better, as it will pay a higher spread to Canadas on reset, assuming that it is reset and not called. However, this will normally be reflected in the market prices of the two securities, so the question of which one is better at the price you can buy it will change from time to time.
2. This new structure was developed by Desjardins as an alternative method of issuing Tier 1 Capital without having to issue fixed-rate preferreds. It is my belief that the banks want to increase their Tier 1 Capital in order to be better positioned to take advantage of the recovery from the Credit Crunch, but do not wish to pay the current high yields on “Straight” perpetuals. The last bank-issued straight perpetual was Royal Bank’s 5.65% (RY.PR.H) … by selling the current structure, the issuing banks are saving 65bp for the first five years and, I think, betting that they can refinance at less than 5.65% in five year’s time.
The “carbon copy” theory is the most likely. BNS was able to show that there was a market for this type of structure and TD is simply taking advantage of the know demand.
I suspect that if the BCE deal goes through and their $3-billion-odd in fixed-floaters is redeemed, there will be a rush of issuance of this type of structure as the banks (and others) attempt to take advantage of that much capital looking for a similar-looking home.
[…] … now there are seven of these Fixed-Reset Thingies. This joins the previous TD deal with this structure, which was 5.00%+160, now trading as […]